The lessons we shouldn’t learn from the UK government’s fiscal U-turns

The UK government’s September ‘mini-budget’ is no more. The chancellor who delivered it has been sacked, and the Prime Minister is hanging on to her position by her fingernails, her authority withered and her humiliation almost complete. The new chancellor has reversed virtually all of the promised tax cuts, and has scaled back support for people’s energy bills. Further spending cuts are likely to be proposed in a couple of weeks. So far, the financial markets have been reassured, with the pound stabilising against the dollar and the price of gilts rising somewhat, though they are still lower, and interest rates higher, than before the mini-budget.

Regular readers of this blog will likely know that I am no right-wing libertarian when it comes to economic policy, and am therefore critical of Trussonomics, which is of course now effectively dead. In today’s post, I thought I would assess some of the wrong lessons that might be drawn in the UK and around the world from the evolving fiscal policy of the current Conservative government. Continue reading

Robert Reich on big oil profits, inflation and imposing a windfall tax

The latest video from Robert Reich’s Inequality Media on the soaring profits of the big oil companies and how they should be taxed to ease the cost of living crisis in the US. As he notes, the UK government has recently enacted such a policy to help households with their energy bills, and may have to go further as the price of energy continues to rise.

Big government, small government, and the fallacy of the growth dividend


Faster growth is not a precondition of improved funding for public goods and services alongside a smaller state. In fact, it will tend to increase the costs of public provision. There are political debates to be had and choices to be made regarding the size and role of the state under capitalism. Shrinking the state by cutting taxes and squeezing public services can easily become socially damaging, without any economic benefit to show for it. In fact, big government can enable a degree of economic dynamism.

In recent decades, particularly since the advent of Thatcher and Reagan, the political right in many countries has made the case for tax cuts and shrinking the state a totem of policy. This has been justified in various ways. Politically and philosophically, it is claimed that allowing people to keep more of their own money supports personal freedom and choice. Economically, it is argued that tax cuts will spur private enterprise and economic growth through providing greater incentives for money-making, and that everyone will thereby be better off if the economy is larger, even if inequality is greater. Those at the top will gain more, but those lower down the scale will gain too, even if by much less. This is the professed nature of ‘trickle-down economics’.

It is also sometimes argued, in defence of policies which aim to reduce public expenditure, that the higher taxes needed to fund that spending cannot be afforded as they will stifle growth. Faster growth must come first, and increased spending on public goods and services like health, education, welfare and infrastructure can only come later, when they can be ‘afforded’, and in such a way that the ‘burden’ of taxation and public spending is kept to a minimum. This can be termed the ‘growth dividend’, in which only faster growth will allow greater public spending.

For rich countries like the US and UK, this is mostly nonsense. Comparing the share of tax and public spending in overall GDP across rich countries suggests that the size of government measured in this way is mostly a political choice. Of course it does have economic effects, but blanket arguments for shrinking the state, or indeed growing it, without a proper discussion of the role of the state in the economy and society, are highly misleading. Continue reading

Can tax cuts reduce inflation?

TaxCutsHere in the UK, foreign secretary Liz Truss, leadership candidate for the Conservative Party and potentially our future Prime Minister, has promised immediate tax cuts should she win the contest. She claims that these cuts will boost economic growth and lower inflation. With this approach to policy she will thus somehow solve two of the major current afflictions of the UK economy. Although she has been criticised by a number of party grandees and former ministers, she is claiming Thatcherite precedent for her views. Her rival for the top job, former finance minister Rishi Sunak, has responded by framing her ideas as ‘fantasy’ economics. Indeed her pronouncements do have a whiff of what has been called ‘cakeism’ (ie having your cake and eating it too). This is a key character trait of our ‘caretaker’ Prime Minister Boris Johnson, who is famously unwilling to deliver bad news, preferring instead to rely on ‘boosterism’ to try and please his audience.

So how could tax cuts deliver the economic goodies? The UK economy has performed poorly since the mid-2000s, compared both with its own history and with other comparable countries. Growth in output and productivity has been weak. Raising productivity growth is vital to improving living standards, including the delivery of high quality public goods and services such as health, education and infrastructure, which also support a vibrant private sector. Continue reading

Misleading the public on tax: burdens, incentives, well-being and society

taxThis post was inspired by the platitudes on tax currently making the headlines in the UK during the current leadership contest for the Conservative party, the winner of which will become Prime Minister. But the issues apply far more widely, to any country with a functioning economy and tax system!

Following the resignation of the UK’s Conservative Prime Minister, Boris Johnson, around a dozen candidates are expected to declare themselves in the running for leadership of the party and the next premier. Many have already stated their intention to do so. They have started by setting out some policy pledges. They have all promised to cut taxes, within varied time frames, from day one to when circumstances allow, though the majority seem to want to go ahead swiftly.

In the midst of global economic, social, and geopolitical crises, perhaps circumstances will not allow for some time. But whatever happens, the competition to be the next UK Prime Minister looks to be stimulating an unhealthy mix among the candidates of fantasy and lies with regards to prospective policymaking.

Announcing the wish to cut taxes may make some headlines (and that is probably the point), but so far such statements are disappointingly devoid of economic, social or fiscal context. The pressure for politicians to overpromise, ultimately leading them to underdeliver, may be difficult to avoid, but it keeps pouring fuel on the fire of cynicism with regards to the political class. It is helpful in this kind of situation to soberly contend with some of the misleading rhetoric and analysis regarding taxation, and the public spending which it funds, lest we forget amidst all the excitement regarding future cuts to the former. Continue reading

Quote of the week: the anti-democratic business model of tax havens

“In fact the business model of these places is deliberately anti-democratic. A tax haven’s purposefully constructed loopholes are not designed to help locals escape laws and rules, but to help foreigners do so, elsewhere, offshore – and they carefully write their laws to ensure that any resulting damage is inflicted elsewhere, ring-fencing the tax haven against self-harm. This ‘offshore’ element means that the people who make the tax haven laws are always separated from those people, elsewhere, who are affected by those laws. So there is never democratic consultation between lawmakers in tax havens and the people elsewhere affected by their laws. That is the whole point of offshore. And it means that offshore is, almost by definition, the equivalent of the smoke-filled room, where business always gets done outside of, and indeed in opposition to, the democratic process. They operate according to the Golden Rule: whoever has the gold, makes the rules.”

Nicholas Shaxson (2018), The Finance Curse: How Global Finance Is Making Us All Poorer, London: Bodley Head, p.67.

Robert Reich on how America got obsessed with the deficit

Robert Reich, who was Labour Secretary under Bill Clinton back in the 1990s, produces plenty of snappy, informative videos and I have shared them on this blog a number of times. Here he is criticising America’s obsession with the government deficit.

Reich claims that this obsession, in its modern guise at least, began under Ronald Reagan, and points out that the concern fails to stretch to the vast and ever-increasing military budget, as well as tax breaks for particular corporations and for the wealthy more generally. Instead, it focuses on the ‘lack of affordability’ of programs which benefit the poor, the middle class and these days even the environment. Republicans in particular seem to do this when Democrats are in power, and then rather ignore the issue when they hold the reigns.

From Reagan and Bush Junior to Trump, tax cuts for the wealthy were prioritised under the mantle of ‘trickle-down economics’, the idea that these cuts would pay for themselves since the wealthy would respond by stepping up investment and job creation. But this assumes that most wealthy people are entrepreneurs and are motivated primarily by ever-higher earnings. The case for this is not so clear cut.

It is worth noting that outside of the Great Financial Crisis of 2008-09 and the pandemic, moments when substantial fiscal stimulus was more justified, Republican policies of tax cuts for the wealthy and large increases in military spending have consistently blown up the deficit rather than pay for themselves by shrinking it through faster economic growth. These outcomes have then led to calls for ‘starving the beast’, or cuts to spending programs which prioritise the most vulnerable.

Robert Reich on the real socialism in America

I find former Labour Secretary Robert Reich to be generally good value, and his short videos as informative and often entertaining. Here he is on what he calls the ‘real socialism in America’, in the form of corporate welfare. Tax breaks and subsidies for firms could benefit the wider economy and trickle down to benefit ordinary households in the form of higher wages, if they were tackling market failure and promoting faster innovation and productivity growth as a form of industrial policy, and if these benefits were captured by such households. But it is not clear that this is the case.

Large corporations often lobby lawmakers to gain favourable treatment, and it seems that wealth and income are frequently trickling up rather than down, raising inequality and constraining aggregate demand in the form of consumption by ordinary households.

If investment is constrained by inadequate savings then greater inequality can boost growth. However, if investment is constrained by inadequate consumption, then greater inequality will reduce growth, since richer households tend to save a higher share of their income than poorer households. The latter seems to have been the case in recent decades. There is thus a potential win-win progressive agenda which reduces inequality by increasing wages for ordinary workers and raises the growth rate, while also boosting employment and productivity.

Questioning Modern Monetary Theory: Part 2

Contando_Dinheiro_(8228640)This is the second part in a new series which explores some aspects of Modern Monetary Theory. As I’ve said already, the series does not aim to be comprehensive. Rather, I cover the aspects which I find most interesting. Here I focus on fiscal policy.

How is the government budget different to a household budget?

Governments of all stripes, as well as many economists, often caution against running persistent budget deficits, with public spending exceeding tax revenue. They liken the situation to a household that cannot maintain spending greater than its income, and accumulates debt until the situation becomes unsustainable. However the government budget is very different to a household budget. Continue reading

Biden, tax and infrastructure – a costly job destroyer?

JoeBidenAccording to the BBC, a coalition of business groups have teamed up to oppose the Biden administration’s proposed increases in corporation tax, which are intended to help fund planned new infrastructure spending. They classify themselves as ‘job creators’ whose positive impact on the economy will be stifled by the new higher rates of tax, which fall on company profits.

Many economists think that US infrastructure is in a poor state, after decades of neglect of public investment, and needs a major upgrade. Carefully targeted investment could therefore pay off handsomely over many years. Infrastructure might be referred to as the lifeblood of the economy. Without underlying support from sufficient transport, energy and communications networks, businesses and households would have a pretty difficult time functioning. The private sector needs modern, effective infrastructure to create wealth and jobs. And in order for the economy to evolve and continue to generate sustainable prosperity which is widely shared, that infrastructure needs similarly to evolve. Think of new and cleaner ways of generating and distributing electricity, travelling to work, and faster internet speeds. Continue reading